Bankruptcy: Tax Debt

Managing Tough CRA During Insolvency

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Bankruptcy can discharge most tax debt, except for director’s liability, debts over $200K, fraud-related debts, and secured tax liens. Pre- and post-bankruptcy tax filings are handled distinctly by Licensed Insolvency Trustees. Trustees receive payment from lenders and creditors, so they aren’t on the side of Canadians in debt. Some may even charge you twice or add extra fees. Stay informed! Reach out via phone, text, or live chat if you need answers.

Understanding Tax Debt in Personal Bankruptcy

Most personal income tax debts can be discharged in bankruptcy, but exceptions exist such as director’s liability and tax debts over $200,000 requiring court approval., Pre-bankruptcy and post-bankruptcy tax debts are managed differently, with specific filing requirements handled by the Licensed Insolvency Trustee., Secured tax debts, such as those with CRA liens, are not discharged through bankruptcy.

Most personal income tax debts can be discharged in bankruptcy in Canada, including unpaid GST/HST and penalties, unless there’s been fraud involved. However, exceptions do exist. For example, if someone has a director’s liability for unremitted corporate taxes or if their tax debt exceeds $200,000 and constitutes 75% of their total unsecured debts, they may need to seek court approval for discharge. Additionally, secured tax debts, which have CRA liens attached, cannot be discharged through bankruptcy. For instance, if someone owes $250,000 in taxes with a lien, they will still have that debt after filing for bankruptcy.

Managing tax returns is important both before and after bankruptcy. Before filing, a Licensed Insolvency Trustee takes care of the pre-bankruptcy tax return, covering the period from January 1 to the day before bankruptcy. Any tax refunds from this period go to creditors. After bankruptcy, the individual is responsible for filing their tax return for that year, which includes any income earned post-bankruptcy. Specific deadlines apply: pre-bankruptcy returns are typically due by April 30 of the following year, while post-bankruptcy returns follow the same timeline. If self-employed, the deadline gets pushed to June 15. Understanding these rules can greatly impact how tax debts are settled and managed during and after bankruptcy.

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Tax Return Filing Requirements in Bankruptcy

Filing two tax returns is mandatory: one for the pre-bankruptcy period and another for the post-bankruptcy period., Pre-bankruptcy tax refunds go to the creditors, while post-bankruptcy refunds remain with the debtor unless offset by prior debts., The deadlines for tax return submissions are crucial, with an extension available for self-employed individuals.

When you file for bankruptcy in Canada, it’s important to know that you must submit two tax returns. The first is for the period before you declared bankruptcy, covering January 1 to the day before you filed. This return is handled by your Licensed Insolvency Trustee (LIT), and any tax refunds you would get from this period go directly to your creditors. The second tax return covers the time from the day you went bankrupt to December 31 of the same year. You are responsible for filing this return if you’re self-employed, while the LIT takes care of it for non-self-employed individuals.

Another key point to remember is that any tax refunds you receive after your bankruptcy belongs to you, unless you have previous debts that might offset those refunds. It’s also essential to keep track of filing deadlines. For most people, the deadline to submit these tax returns is April 30 following the tax year, but if you’re self-employed, you can extend it to June 15. Understanding these requirements can help ensure you’re on the right track through your bankruptcy process!

Post-Bankruptcy Tax Obligations and Credit Impact

Post-bankruptcy tax debts remain the individual’s responsibility and are not discharged., Bankruptcy impacts credit ratings for 6-7 years, with a longer duration for subsequent bankruptcies., Tax debts from fraud, director’s liability, and secured liens are non-dischargeable, affecting long-term financial strategy.

After filing for bankruptcy in Canada, individuals are still responsible for their post-bankruptcy tax obligations. This means that any tax debts accrued after the bankruptcy date do not get wiped out and must be settled by the debtor. For example, if you earned income after declaring bankruptcy and owe tax on that amount, it remains your responsibility. On the other hand, taxes owed for the period before bankruptcy are managed by a Licensed Insolvency Trustee (LIT), and any tax refunds for that time will go to creditors to help pay off debts incurred before bankruptcy.

The impact of bankruptcy on your credit rating is significant and can last between six to seven years for first-time filers, and even longer for those who have gone through bankruptcy multiple times. If you find yourself in a position of tax debts linked to fraud or if you’re liable as a director for unpaid company taxes, be aware that these types of debts are also non-dischargeable, meaning they will continue to affect your future financial plans long after your bankruptcy is complete. Understanding these distinctions is crucial for anyone navigating the complex aftermath of bankruptcy and planning their financial future.


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